FHA and Conventional Loans - Essay Example

FHA and Conventional Loans The paper aims at comparing and contrasting various features of the FHA loans and the conventional loans. The banking and finance jurisdiction under focus is the Californian financial system. The two financial services are provided by several financial institutions within the Californian financial system. The FHA insured loan illustrates the mortgage insurance and mortgage loan. The mortgage product is provided by a financial lender that is approved by the FHA. The FHA insured loans entails the category of federal insurance, which have enabled the low income Americans to access finance for buying a home. The mortgage insurance is administered by the Federal Housing Administration, and requires an initial deposit of the upfront mortgage insurance premium (UFMIP). The value of this premium is the same as 1.75% of value of the base loan. The mortgage product is financed entirely by the lender, and the total amount is paid to FHA. The monthly mortgage insurance premium applies, and it depends on the loan to value ratio, and the amortization term (Wright, 2009). The FHA mortgage product was introduced after the 1930s Great Depression, following the rapid increase in the level of defaults and also foreclosures. The program was aimed at giving the lenders with adequate insurance. The federal government also provided subsidies or certain FHA programs; however, the key administration goal was to ensure a self supporting mortgage system, due to the insurance premiums given to the borrowers. Later on, the organizations dealing with the Private Mortgage Insurance (PMI) entered the program. Presently, the FHA mainly serves the individuals who cannot access the conventional down payment, in addition to the people who do not meet the requirements of the PMI. A huge proportion of the loans within the conventional market apply the Fannie Mae and Freddie Mac requirements of conforming loans. The conforming conventional loans are mainly equal to or less than $417,000 for the single family home. The limits for the conforming loans are greater in the pricier parts of the country; for instance, in the California region where it is illustrated at $625,000. There are also minimum criteria for the income levels, borrower credit scores, and the minimum deposit level (Congressional Budget Office, 2010). Majority of the conventional loans require down payments that are between 5% and 20%. The guidelines are presently being reviewed, but they must have a minimum credit score of 620. The credit scores below 740, makes the lenders increase the fees. The lenders credit score reduces when compared to the loan-to-value (LTV). Conventional loans are grouped into two; conforming and non-conforming. The non conforming loans are also referred to as the jumbo loans, and they are above the lending limits determined through Fannie Mae and Freddie Mac. Majority of the conventional mortgages possess interest rates that are adjustable or fixed. The loan term for the fixed interest is between 15 and 30 years. The shorter term conventional loans attract the interest rates that are relatively lower. The Adjustable Mortgage Rates (AMR) varies according to the standard financial index rate like LIBOR. The monthly payments can increase or decrease accordingly. The FHA mortgage is very appropriate in California. Very many California residents have owned homes through the FHA mortgage plan. The attractive feature of the FHA mortgage is that it does not require income limits. The down payment for the single family home is only 3.5%. The seller is also allowed to pay a proportion of the closing costs of the buyer. For instance, if the selling value of a home is valued at $200,000, then the down payment is $7,000. The FHA loan criteria applicable in California are almost similar to the guidelines applicable for other states. The major area of differences entails county loan limits. The lending limits for the FHA loan are determined by the congress on an annual basis. Due to the value differences, the loan limits are greater in the Californian counties that are pricier (Vina, 2007). The FHA loans that are more than customary FHA limits, are referred to as the FHA jumbo loans. The Federal Housing Administration ensures that the FHA appraisers adequately adhere to guidelines, before participating in home appraisal. The mortgage lenders must also be effectively approved before getting involved with the loan programs. The 2015 loan limits for the counties in California according to FHA are categorized into four areas; single family, two family, three family, and finally four family homes (Monroe, 2011). The pricier counties in California are; Alameda, Contra Costa, Los Angeles, Marin, Orange, San Benito, San Francisco, San Mateo, Santa Barbara, Santa Clara, and Santa Cruz. These pricier regions have the same loan limits. The one, two, three and four units family homes have financial limits at; $625,500, $$800,775, $967,950 and $1,202,925 respectively. The conventional loan programs have diverse programs that are suitable for the residents of California. For instance, the Banc Home Loans provides the diverse mortgage products. The potential loan applicants are expected to effectively analyze each mortgage product adequately with the loan representative. The California Housing Finance Agency is one example of the mortgage product. The product is only available in California. Thus it is tailor made to suit the interests and expectations of the California residents. A key restriction that applies, involves the first time home buyer. The financial institution can enable the buyers access the down payment. This mortgage product integrates both the conventional and the FHA financing options. The restrictions are also applicable for the areas of family size and income (Mishler, 2012). The FHA loans are the most appropriate according to my analysis. This is due t the easily accessible down payment grants. Te down payment financial assistance and also the California community redevelopment programs provide affordable house ownership chance for the first time buyers, low to moderate income earners, and the people who want to experience home ownership. The grant categories that are provided include; Grant America Program, seller funded programs, and federal funded programs like the American Dream Down Payment Initiative, and the local agencies that utilize the mortgage revenue bond funds. The down payment grant programs make it easier for the interested California residents to own homes. References Congressional Budget Office. (2010). “Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market.” Mortgage Financing. Mishler, Lon. (2012). Consumer and business credit management. Homewood, Ill: Irwin. Monroe, Albert. (2011). How the Federal Housing Administration Affects Homeownership. Cambridge, MA: Harvard University Department of Economics. Vina, Gonzalo. (2007). "U.K. Scraps FSA in Biggest Bank Regulation Overhaul". Businessweek Wright, Kai. (2009). "More Mortgage Madness". The Nation. Read More